Why Economic Growth Will Continue to Disappoint in 2012

Tutto va bene…

That was what the crew told passengers on the Costa Concordia just before it sank.

And it was what the crew of the USS America — the biggest cruise ship of all — were telling passengers last week.

Tutto va bene.

Trouble was, tutto was not going as bene as they claimed. Instead, the ship is sinking.

Stocks sank on Friday. Oil slipped below $100. And the yield on a 10-year T-note dropped to 1.89%. Gold kept going up.

None of these are signs that the voyage is going well.

The US economy has come back to output levels of ’07. But this feeble rebound not only holds the title of “weakest post-war recovery ever,” it also shows that something else is going on. Most economists have no idea what. So, they just think this “recovery” is unusually slow. Ben Bernanke, for example, has pledged to hold down interest rates (at negative real levels) for another three years. He also let it be known that he has his finger on the trigger, ready to blast out some more QE at a moment’s notice.

Last week produced news that the economy expanded in the previous quarter. It went up at a 1.8% annual rate, far below the 3% consensus estimate of economists. That returned it to ’07 output levels, but at what cost? The feds have added $6 trillion in new debt to regain some $600 billion in annual output. Whoa!

And indications are that growth will be just as disappointing this year as it was last. Bloomberg has the story:

US economic growth may not top 2 percent this year and a third round of quantitative easing by the Federal Reserve would have little effect, said Martin Feldstein, a professor of economics at Harvard University.

“We’re going to have a hard time reaching 2 percent this coming year,” he said… The economy is still in a “danger zone,” Feldstein said, even as the recession risk “is less now than it was.”

Feldstein, speaking before the GDP report was released, said last year’s growth in household spending was largely due to consumers drawing down their savings, which he said they won’t be able to maintain this year.

Another Bloomberg report tells that consumer spending is already weakening:

Spending at retailers lost momentum each month in the fourth quarter, slowing from a 0.7 percent gain in October to a 0.1 percent increase last month. Merchants including Macy’s Inc., Gap Inc. and Target Corp. cut prices to attract more business during the holiday shopping season…

Government agencies also struggled last quarter as they cut spending at a 4.6 percent annual rate, the fifth straight decline. For all of 2011, government spending dropped 2.1 percent, the biggest decline since 1971.

Our guess is that consumer spending will weaken further as the bear market in housing gets worse. December house sales were the worst in nearly half a century. AP is on the beat:

The Commerce Department said Thursday new-home sales fell 2.2 percent last month to a seasonally adjusted annual pace of 307,000. The pace is less than half the 700,000 that economists say must be sold in a healthy economy.

About 302,000 new homes were sold last year. That’s less than the 323,000 sold in 2010, making last year’s sales the worst on records dating back to 1963. And it coincides with a report last week that said 2011 was the weakest year for single-family home construction on record.

The median sales prices for new homes dropped in December to $210,300. Builders continued to [slash prices] to stay competitive in the depressed market.

And guess what? The outlook for housing is still not improving. Business Insider explains why:

Michelle Meyer, the well-known housing analyst for BofA/ML, has some bad news: The housing crisis isn’t over.

In fact, in her 2012 outlook piece, she says it’s “far from over” and that prices still have another 7% to decline nationally.

The basic problem: There are still tons more foreclosures or “liquidations” yet to come…our securitized products research team estimates another eight million homes will be liquidated over the next four years, which adds to the six million homes that have already been liquidated since 2007. All told, we expect 14 million foreclosures or a quarter of all homeowners with a mortgage.

Ms. Meyer’s estimates seem rather optimistic to us. We’d guess that house prices will go down another 20%. Maybe more. Because, people have less money to spend on housing. Real disposable incomes are lower today than they were a year ago.

People who buy houses don’t really worry too much about the price. What concerns them is the monthly payment. They buy as much house as their monthly income will allow.

That was the real driver of the housing bubble of ’05-’07. Interest rates had been going down for 30 years, lowering monthly mortgage payments. That made it easier to pay a mortgage. Housing prices were going up steadily, giving the impression that houses were a good investment. And the mortgage industry would lend to anyone, solvent or insolvent, jobless or working, dead or alive. That put a lot of air into the housing market.

Now, interest rates are still going down, as near as we can tell. But with incomes going down and lenders much more cautious, the air has whooshed out of the market. It’s no longer pressure-packed. Now it’s vacuum-sealed.

Remember, household debt-to-income was only 70% at the beginning of the ’80s. Now, it’s 120%. In order to get it down, households need to unload debt — especially mortgage debt.

That is, they need to save. Savings rates have recently fallen…to 3.5% down from 5.7%. They will probably go back up as the Great Correction continues.

Which will mean…housing will fall, maybe by 20% more.

Let’s see, housing falling…incomes falling…consumers retrenching…negligible GDP growth…

Tutto va bene!

But back to why the US is going to hell…

The country has been at war in two out of three years since 1989. The interesting thing about it is that 1989 marked an historic juncture. It was the year that the US had no more worthy enemies. The Berlin Wall fell that year. The Soviet Union bit the dust. Francis Fukayama said it was maybe the “end of history.” Charles Krauthammer said it was the beginning of a new world, with only one superpower. He called in a “uni-polar world.”

But a country that has been taken over by its military industry cannot permit peace. It must make war — either against its own people or against some other people. Having no suitable enemies, the deficit-fatted pentagon, its rich lobbyists and the nation’s lard-butt patriots had to find some unsuitable ones.

One of our new, old-fashioned conservative friends explained what happened next:

They turned to the Mideast. Why? As enemies, the Arabs/Muslims have several advantages:

  • There are not many in the continental US; not enough to influence elections or run much of a counter-propaganda campaign
  • There’s oil in the Mideast; the oil companies contribute a lot of money to campaign coffers. And oil really is a strategic commodity
  • Americans don’t understand Arabs or Muslims…yahoo Christians don’t trust them. The Jews hate them.
  •   They can’t really do us much harm. We can fight them forever…at huge expense and never win or lose.
  • It allows us to make common cause with Israel’s right-wingers…and brings in a lot campaign money from Jewish groups. That’s why all the Republican candidates — except Ron Paul — are pro-war.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning